Cleaning up after Christmas
Beware Christmas debt! As we wander around the shopping malls leading up to Christmas, it's so tempting to pull out our credit card to buy gifts and treats for family and friends. Of course, our intention is to quickly pay off the amount owing as soon as we get back to work in the New Year. Problem is, for many New Zealanders that doesn't happen.
Some credit card statistics
Leading up to Christmas last year the New Zealand Herald reported:
- New Zealanders were collectively paying more than $600 million a year in interest on personal credit card debt.
- New Zealanders collectively owed $5.542 billion on plastic cards at the end of July 2012. Of this $5.264 billion was on personal credit cards.
- Nearly two-thirds of personal credit card debt is incurring interest.
- Despite credit card rates of just 12% being available, the average interest rate on outstanding balances is 17.8 per cent.
- That equates to $638 million in payments going into the pockets of financial institutions over the past year.
Credit card debt is dangerous
Now, I know most people will say, "But I pay off my card every month before it incurs any interest." The reality is, most people don't!
Much of the debt loaded onto credit cards occurs in the period leading up to Christmas. Last December, we collectively loaded over 5 billion dollars onto our credit cards. Did we pay it all off within the month? No. In January this year we still owed over 3.5 billion dollars of that, plus the interest it was accruing.
Credit card debt is dangerous because of the high interest rate it incurs. For many people, going into debt on their credit card puts them into debt for a long, long time.
It makes sense to limit the use of your credit card leading up to Christmas, but just in case it's too late, here are a plan to help you clean up after Christmas if you find yourself in debt when January 2014 arrives.
The Futurisk plan to escape Christmas debt:
- Make escaping debt a priority.
This is the most important step: make a conscious decision that you are going to do whatever it takes, and make whatever sacrifices you need to make, to get out of debt as quickly as possible. - Work out what you can do without.
To become debt free as soon as possible will require some short-term sacrifices. Think about some things that you could do without for the sake of being debt free.
Maybe you only buy coffee twice a week at work instead of every day. Maybe you don't buy that weekly magazine for a little while. Maybe you don't go out for dinner until the bill is paid. Whatever sacrifice you make, it will be worth it to escape the stress and financial cost of credit card debt.
Just make sure you put the money saved towards paying off that debt. - Pay off more than the minimum.
This is the biggest mistake made by people with credit card debt. They believe that, by paying the minimum payment required each month, the debt will quickly disappear. While it will eventually disappear, it will be a long and costly process.
The quicker you pay off debt, the more you save in interest and the better off you are financially.
Having decided what sacrifices you will make with your spending, calculate how much you can put towards paying off your debt each month, and stick to it. - Don't add any more to your credit card.
The temptation is always there to treat yourself. "It's only a few dollars," we say. But all those few dollars add up. When the credit card interest rate is added to that, we are just prolonging our time in debt. - Set a goal.
Having made the decision to be debt free; and worked out where you can economise; and calculated what is the most you can repay each month; and having determined not to add anything to your card, set a date at which you can be debt free. Circle that date on your calendar or in your diary; keep that date at the forefront of your mind... it's the day you'll feel a great sense of release--you'll be debt free! - Celebrate.
Being debt free is something worth celebrating. Plan a celebration for the day you pay off your debt - but don't make it an expensive celebration, and don't put the cost of celebrating onto your credit card!
The team at Futurisk would love to talk to you about all aspects of your personal finances and insurances. Click here to contact Futurisk.
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